Sensex Surges 250 Points; Realty Stocks Gain Most

After opening the day flat, share markets in India are trading on a strong note and are presently trading above the dotted line. Sectoral indices are trading on a mixed note, with stocks in the realty sector and stocks in the metal sector witnessing maximum buying interest.

The BSE Sensex is trading up by 240 points (up 0.7%) and the NSE Nifty is trading up by 70 points (up 0.7%). Meanwhile, the BSE Mid Cap index is trading up by 0.8%, while the BSE Small Cap index is trading up by 1.2%. The rupee is trading at 68.80 to the US$.

In news from stocks in the telecom sector. Idea Cellular share price was in focus today after it was reported that the Department of Telecom (DoT) gave a conditional nod to the merger between the Idea Cellular and Vodafone India.

However, before the two telecom giants begin to operate as one entity, the DoT insists on a Rs 72 billion towards one-time spectrum charges from the entities.

The DoT has asked for a bank guarantee of Rs 33.4 billion from Idea Cellular, while Vodafone has to pay Rs 39.2 billion in cash in lieu of spectrum liberalization.

Both Idea and Vodafone were expecting the merger deal to create India's largest telecom company to be completed by June 30, 2018. However, the process was stalled due to regulatory approvals.

Notably, Vodafone India and Idea Cellular merger is set to create India's largest telecom operator, surpassing Bharti Airtel Ltd. The top operator will have a revenue market share of around 37% and over 433 million subscribers.

The two companies were set to start operating as one entity from July 1 and for that to happen, the merger proceedings must be completed this month. Idea has called an extraordinary general meeting on June 26 to consider the proposals, including changing the name of the merged entity and raising funds of Rs 150 billion through debentures.

It will be interesting to track the progress of the new telecom leader, and whether it can sustain the pole position, in the hyper-competitive telecom industry.

At the time of writing, Idea share price was trading up by 3%.

The entry of Reliance Jio and the fierce tariff war it has triggered has set off brisk activity in the telecom industry for fundraising and consolidation, as the incumbents look for ways and means to fend off the competition.

Telecom Sector: A decade of Underperformance

Note that the whole telecom business has been an underwhelming story so far. While the telecom subscriber base has increased from 300 million in 2008 to 1.2 billion in 2017, investors have little to cheer. The BSE Sensex has gone up 3.25 times in nine years, but the BSE Telecom Index has not moved an inch from its levels of 2008.

Telecom companies are straddled with high debt, intense competition, and lack of pricing power. High spectrum costs and regulatory issues have hampered the sector. While consumers have benefited from low costs and new players fighting for their share, investors have suffered.

With the entry of Reliance Jio, the competition has intensified further. Reliance Jio's low-cost offerings and strategy of capturing market share will further dent the sector. The sector has been a classic 'value trap'. While it always looks cheap compared to other sectors, it has failed to provide any reasonable returns. We also believe the situation is unlikely to change in the near future. For an investor, it's important to differentiate between 'value' and 'value traps'.

Moving on to news from the auto sector. Auto sales across the board witnessed handsome growth in June as vehicle sales across all categories registered a rise of over 25% in June to 227,951 units from 181,926 units in the same month a year ago.

Domestic passenger vehicle sales rose 37.5% to 273,759 units in June this year from 199,036 units in the corresponding month last year. Of this, car sales were up 34% while motorcycle sales went up by 24% as compared to June last year.

However, this growth comes on the backdrop of a lower base last year which saw a slump in vehicle sales in anticipation of Goods and Services Tax (GST) and for the shift to BS-IV (Commercial vehicles & two-wheelers).

The biggest gainers were commercial vehicle sales which were up 41.7% in the month.

Note that auto sales are one of the major indicators for growth in the Indian economy.

For the first nine months of FY18 at least, the auto industry has done well to grow in double digits after some lean years.

Vehicle sales grew by 11.3% YoY during this period. The best performing of the lot were commercial vehicles (CVs), volumes of which grew by 15% YoY. Two-wheelers also did well growing by around 12% YoY.

We're keeping a close eye on auto stocks.